Program-Related Investing: Skills and Strategies for New PRI Funders

Program-related investments are loans and equity investments that foundations provide at favorable rates to support activities that have a direct charitable purpose. Frequently referred to as PRIs, they expand the resources from foundations - and, in the right circumstances, can be even more effective than grants. Any foundation can make PRIs, yet most shy away from them. In this guide, experienced PRI makers walk through the process, offering practical advice at each step - from explaining the concept to your board to structuring and closing your first deal.

Underwriting for this guide was provided by the Ford Foundation and The John D. and Catherine T. MacArthur Foundation.

Highlights

  • Skills for getting started
  • Making the first deal
  • Lessons learned by PRI makers

What's in the Guide?

  • What Is a PRI? Program-related investments can be valuable tools for foundations, applicable in any field where below-market loans or other investments can advance charitable objectives.
  • Deciding to Make PRIs: Putting the Pieces in Place: Before making its first PRI, a foundation should do a few basic things: assemble the necessary financial and legal skills, get its trustees on board with the idea, and locate a likely deal or two.
  • How Three Foundations Got Their Feet Wet with PRIs: There's more than one way to get into the PRI pond. Here are three approaches: jumping into a full-fledged commitment to PRIs, wading in slowly while developing skills and policies as needed, or getting thrown in by circumstance.
  • Making and Structuring Deals: PRI funders typically follow some basic steps as they analyze a potential deal, conduct due diligence, and establish its terms.
  • PRIs in the Big Picture: Effective PRI makers tend to think strategically about how program-related investing can stretch a foundation's resources and expand their own skills as grantmakers.
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    Resources for PRI Funders

    Brody Weiser Burns. Maintained by a consulting firm specializing in PRIs, this website offers useful case studies and publications on various aspects of PRI making. Matching Program Strategy and PRI Cost, for example, gives sound advice on assessing and managing program and financial risks.

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    Deciding to Make PRIs: Getting the Board on Board

    Get the frame right — the trick, said one foundation president, is to introduce the idea without being didactic. Start off with some informal education by asking trustees whether or not they have heard of PRIs.

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    Opportunities for Smaller Foundations

    A handful of large foundations have dominated the PRI field to date, yet small foundations may be poised to make major contributions.

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    How to Staff a PRI Team
    1. Look inside the foundation.
    2. Train staff as investors.
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    Deciding to Make PRIs: Skills and Staffing Required

    PRI making requires three sets of skills: programmatic, financial, and legal. Foundations structure those functions somewhat differently, depending on their size, strategy, and internal capacities.

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    Deciding to Make PRIs: Introduction

    Yet, because PRIs are also financial investments, they require skills not necessarily demanded by straight grantmaking.

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    PRIs: Legal Definition

    PRIs are the historical product of the Tax Reform Act of 1969, which, among other things, imposes fines on foundations if they make “jeopardizing investments” — that is, any investment (including any loan) that could imperil the foundation’s ability to carry out its charitable activities. Program-related investments are the exception to the rule. Under Section 4944, private foundations are allowed to make “program-related investments” that meet three criteria:

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    Simply Put: What is a PRI?

    PRIs are investments made by foundations in support of charitable purposes, with the explicit understanding that those investments will earn below-market returns, adjusted for risk and mission. The vast majority of PRIs are loans or loan guarantees, and although they are not grants, they count toward a foundation’s payout requirement in the year a disbursement is made.

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    Getting Your Feet Wet Three Approaches

    The best way to learn to make PRIs is by doing it. As the executive director of one new PRI-making foundation put it, "It comes from experience, and the only way you can get experience is to make some investments." PRI makers seem to have gotten into the PRI pond in one of three ways: they jumped in, they waded in, or they were thrown in by circumstance.

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    Equity PRIs

    Loans are good, but equity is better.

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    Top PRI Mistakes

    Taking on too much risk by going it alone. Funding a project independently, rather than collaborating with others or working through an intermediary, can make for hard going if a project turns out to be poorly designed, or the project developer lacks experience, or the assumed market fails to materialize.

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    Finding and Using PRI Consultants
    • The old-fashioned way, through networking. "Finding good consultants is always a challenge," one PRI maker noted. There are a handful of reputable firms that specialize in PRI consulting, she said, but "the best way to go about it is to talk to colleagues" with a lot of experience and lots of contacts.
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    Three Tips for Novice PRI Funders

    Take another look at your grant portfolio – and talk up PRIs to current grantees. Sometimes the best investment opportunities are already in a foundation’s grant portfolio.

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    Mission Related Investments

    One foundation framed the question, “Should a private foundation be more than a private investment company that uses some of its excess cash flow for charitable purposes?”

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    PRIs in the Big Picture

    Here are the leading reasons why foundations use PRIs:

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    From Idea to Closing: One Foundation’s Process

    Early-stage analysis. “We have a document request list that we give to the grantee or the organization. We try not to have them generate anything new for us at this stage. Is this a deal that we’re willing to look at further? Does it pass some basic thresholds for feasibility? Does it really manifest the program interests of the foundation? Does it satisfy basic thresholds for charitability — in other words, is it legal? Does it offer some reasonable chance for repayment — is it financially feasible? Assuming we come up with a yellow or green light, we develop a list of questions that the due diligence process should be addressing. I’d say about 60 percent of the potential deals make it through this phase.”

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    How Much Interest Should we Charge?

    There are no hard and fast rules governing PRI interest rates, but there are some guidelines. The important thing to remember is that, in order to meet the IRS charitable purpose requirement, a PRI must generate below-market returns on a risk-adjusted basis. There are two general approaches to calculating interest and returns:

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    Restructuring Floundering PRIs

    In some circumstances, the foundation has “called” its collateral, which could be in the form of real property, general liens, or cash collateral. In other cases, the foundation has restructured the loan to extend the repayment period or accelerate repayment.

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    Making and Structuring Deals
    1. Due Diligence - In general, the essential factors include capacity and tenure of management, financial position (capitalization, debt, cash flow), and financial track record. Legal due diligence also starts at this point.
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    Case Study - Jumping In: Building PRIs into Overall Strategy

    Not long ago, for example, a family foundation began looking at PRIs as a way to extend its long-standing commitment to fighting poverty in low-income communities. For over a decade, the foundation had focused on building leadership and capacity among the small, grassroots organizations in its grant-making portfolio. After making a few grants to help organizations develop revenue-generating enterprises, program staff began to wonder if PRIs might help them build up their credit histories and business skills. At that point, grant makers reasoned, the organizations would have access to more capital than the foundation could provide with grants alone.

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    Deciding to Make PRIs: Finding a Few Good Deals

    The good news for inexperienced PRI makers is that finding good PRIs is a lot like finding good grants – but with a few twists. In most cases, PRIs emerge from a foundation’s existing program work, usually from current grantees. 

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This guide was written primarily for foundation executives, grantmakers, and donors who are interested in getting started with program-related investing. You may find it especially valuable in some of the following situations:

  • With your board: Sharing the guide or excerpts from it with your trustees may help them think through the advantages and demands of developing a PRI portfolio. 
  • With grantees: Many people who contributed to this guide suggested that it's a good idea to market the availability of PRIs actively to existing grantees. If your foundation is thinking of a PRI program, you might want to share this guide with grantees to gauge demand.
  • With advisors and consultants: In all likelihood, you'll engage consultants to help you with PRIs - at least at the beginning. You can use this guide to invite feedback and dialogue.
  • Before talking with more experienced PRI makers: If you're planning to co-invest with an an experienced PRI funder, this guide will familiarize you with some basic concepts and terminology and help make your conversations more productive.
  • As a starting point for learning more: If the information in this guide intrigues you, consider joining the PRI Makers Network.

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